Exemption order under regulation 11 of SEBI (SAST) Regulations, 2011 in the matter of Patel Engineering Limited

WTM/GM/CFD/28/2019-20 SECURITIES AND EXCHANGE BOARD OF INDIA ORDER UNDER SECTION 11(1) AND SECTION 11(2)(h) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 READ WITH REGULATION 11(5) OF THE SECURITIES AND EXCHANGE BOARD OF INDIA (SUBSTANTIAL ACQUISITION OF SHARES AND TAKEOVERS) REGULATIONS, 2011. IN THE MATTER OF PROPOSED ACQUISITION OF SHARES AND VOTING RIGHTS IN- TARGET ACQUIRER(S) COMPANY Patel Engineering 1. Praham India LLP (Acquirer 1), Limited 2. Raahitya Construction P Ltd. (Formerly known as “Patel Corporation LLP”) (Acquirer 2) 3. Rupen Patel (Acquirer 3) (collectively called as Acquirers)

BACKGROUND – 1. Patel Engineering Limited ("Target Company") was incorporated under the Companies Act, 1913 on April 02, 1949. The Registered Office of the Target Company is situated at ‘Patel Estate Road, S.V. Road, Jogeshwari (West), Mumbai – 400 102, Maharashtra’. The shares of the Target Company are listed on BSE Limited ("BSE") and National Stock Exchange of India Limited (“NSE”).

2. Securities and Exchange Board of India (“SEBI”) received an Application dated October 24, 2017 ("Application") from Praham India LLP (“Acquirer 1”), Raahitya Construction P Ltd. (Formerly known as “Patel Corporation LLP”) (“Acquirer 2”) and Rupen Patel (“Acquirer 3”) (hereinafter collectively referred to as "Acquirers") under Regulation 11(1) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Regulations") seeking exemption from the applicability of Regulations 3(1) of the Takeover Regulations in respect of proposed acquisition of equity shares/voting rights in the Target Company, by the Acquirers, in the proposed right issue of the Target Company. An Addendum to the said application was received vide letter dated July 26, 2018 and various other submissions were filed vide letters dated Jan 30, 2019, Feb 21, 2019, March 19, 2019, April 08, 2019 and April 23, 2019. Order in the matter of Patel Engineering Limited

3. As per the Application (together with the Addendum and the subsequent submissions), the following are the brief facts for consideration in this Order - (1) The Target Company was incorporated in 1949 and has been engaged in construction business including a) Hydro-power projects including dams, tunnels, power-houses and barrages; b) Irrigation and water supply projects including dams, weirs and pump houses; c) Urban infrastructure projects including sewerage, Micro tunnelling and horizontal directional drilling and pipelines; and d) Transportation projects including roads, bridges, flyovers and tunnels for railways.

(2) The Target Company has from time to time availed of financial assistance from banks and other financial institutions (the Lenders) for various purposes.

(3) Due to several facts and circumstances, such as delay in realization of Government receivables (claims), slowdown in infrastructure sector during the period between 2013-2016, resulting in reduced number of new projects through bidding and reduction in receiving approvals for land acquisition and other relevant approvals, non-release of assessed/sanctioned limits under Corrective Action Plan (CAP) and delays in monetization of real estate assets, the Company’s operations were adversely affected. The Target Company faced liquidity crisis, which ultimately resulted in delay in servicing of debt on various occasions, because of which the Target Company’s account was designated as an SMA 2 Category with respect to few Lenders.

(4) In order to preserve the value of the Target Company, its assets and to provide a long term solution, it was decided to invoke Strategic Debt Restricting (SDR) Scheme in accordance with the RBI Circular DBR.BP.BC.NO.101/21.04.132/2014-15 dated June 08, 2015 with May 26, 2016 as the reference date. In pursuance of the same, on November 22, 2016, the members of the Joint Lenders Forum (JLF) were collectively allotted 51.08% paid-up equity shares of the Target Company through conversion of a part of the outstanding debt of the members of the JLF into equity shares (SDR Issuance), in accordance with the RBI Guidelines. As a result of the same, the shareholding of the Promoters and Promoter Group in the Target Company was reduced from 50.63% to 24.77% of the total paid up equity share capital of the Target

Company. However, even after the SDR Issuance, a major portion of debt of the members of JLF (the Residual Debt) still remained on the books of the Target Company.

(5) Since even after the SDR Issuance, the Target Company was not in a position to repay the Residual Debt, it was decided to implement a Scheme for Sustainable Structuring of Stressed Assets (“S4A scheme”). As per the terms of S4A Scheme, JLF in its meeting dated Aug 08, 2017 asked Promoters/ promoter group to infuse fresh equity of Rs.150 Crore (the S4A Capital), to restore company’s liquidity situation, which the promoter/promoter group of the Target Company agreed to do. Accordingly, it was decided to infuse the capital in the form of Rights Issue. The Board of Directors in its meeting dated Oct 05, 2017 approved the Right Issue of equity shares with or without warrants for an amount up to Rs.300 Crore. Further, given the possibility of the Rights Issue not being subscribed to by all the non-promoter shareholders considering the state of affairs of the Target Company, the Acquirers agreed to subscribe to any unsubscribed portion of this Rights Issue to ensure that the minimum subscription threshold of 90%, as mandated under Regulation 14 of the erstwhile SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulation) is met. However, given that the said over-subscription by Acquirers (the Mandated Over- Subscription) could have potentially resulted in the aggregate shareholding of the Acquirers and the other members of the Promoter Group exceeding the 25% threshold under Regulation 3(1) of the Takeover Regulations, thereby necessitating a mandatory open offer in terms of the Takeover Regulations, the Acquirers submitted the aforesaid Application dated October 24, 2017 to SEBI seeking exemption from mandatory open offer in the event of them breaching the 25% threshold.

(6) Post filing of the abovementioned Exemption Application dated October 24, 2017, which was still pending, the financial situation of the Target Company further deteriorated and the requirement of implementation the S4A Scheme became an immediate necessity, leading to the Overseeing committee (OC), constituted under the aegis of the RBI, issuing a letter dated Nov 10, 2017 (OC Letter) mandating inter alia that the members of the Promoter/Promoter Group of the Target Company bring in the S4A Capital in two tranches of Rs.75 Crores each and that the first tranche be brought, in the form of unsecured subordinated debt, as a pre-condition to the implementation of the S4A Scheme. Accordingly, on November 24, 2017, the Acquirer 2 infused Rs.75 Crore by way of unsecured subordinated debt (the First Tranche S4A Infusion). On the basis of the same, Acquirer 2 infused the remaining amount of Rs.75 Crore by June, 2018 Thus, there was total capital infusion of 150 Crore (S4A Capital Infusion).

(7) The S4A Capital infusion was financed through a borrowing by Acquirer-2. As a condition to availing this financing, Acquirer 2 was required to create a pledge/negative lien on the equity shares he would acquire pursuant to the Rights Issue as security for this financing.

(8) The entire S4A Capital has been transferred to the escrow account established pursuant to the Financing Documents entered into with the Lenders, for utilization towards repayment of the existing Residual Debt. Such infusion has helped in restoring liquidity in the Target Company and in enabling a successful turnaround of operations.

(9) Besides the above, the OC Letter had also mandated that a certain part of the Residual Debt be retired by way of invocation of pledge on the shares pledged by Acquirer-1, who, as part of the Financing Documents, had provided guarantees to the Lenders of the Target Company and had secured the indebtedness to such Lenders by a pledge on 1,56,99,469 (10%) equity shares in the Target Company. Accordingly, out of such pledged shares, the pledge on 63,23,532 (4.03%) equity shares of the Target Company was invoked on November 27, 2017, November 28, 2017 and December 7, 2018, pursuant to which, the shareholding of the members of the Promoter/Promoter Group further reduced to 20.74% of the paid up equity share capital of the Target Company.

(10) In addition to the above, Rs.30 Crore was also infused by Rupen Patel (Acquirer – 3), way back in November 2016 as an interest free unsecured loan and this remains outstanding since then.

(11) Subsequently, due to fresh issuance of equity shares by the Target Company under Employee Stock Option Plan, resulting in increase in paid up capital of the company, the shareholding of the promoter/promoter group further reduced from 20.74% to 19.46%. Even further, due to reclassification of certain promoter entities from the Promoter Category to the Public Category on January 10, 2019, the shareholding of the promoter/promoter group further reduced to 19.46%.

Proposed Transaction in respect of which exemption is being sought: – 4. In light of the abovementioned facts and background, the Target Company desires to undertake a fund raising: (a) to infuse more equity; and (b) to enhance its net-worth by up to Rs.300 Crore. As per the Target Company, a part of this fund raising is intended to be through the capitalization of the debt. Of the various options available for such fundraising, given the financial conditions of the Target Company, a Rights Issue would be the most feasible option and if such Rights Issue is not subscribed to by the non-promoter shareholders, the Acquirers (being Promoters) are keen to subscribe to the additional shares (i.e. part conversion of unsecured loan given by the Promoters to the Target Company into equity shares as part of rights subscription amount) to ensure that the Rights Issue meets the minimum subscription threshold of 90% (as mandated under Regulation 14 of the ICDR Regulations, which is a pre-requisite for a successful Rights Issue (the “ICDR Threshold”). However, as stated above, since such over-subscription by the Acquirers may result in the aggregate shareholding of the Acquirers and the other Promoters exceeding the 25% threshold under Regulation 3(1) of the Takeover Regulations and thereby necessitating a mandatory open offer in terms of the Takeover Regulations, the Acquirers seek exemption under Regulation 11(1) of the Takeover Regulations from the said requirement of making an open offer in case of breach of the said threshold under Regulation 3(1).

Grounds for seeking exemption - 5. The Application lists inter alia the following grounds for exemption from the applicability of regulations 3(1) of the Takeover Regulations:

(1) The Capitalization forms part of a larger condition by the members of the JLF to continue infusing further funds in the Target Company in future and thereby enabling continued and sustainable debt restructuring. The proposed Rights Issue and any subscription by the Acquirers to the unsubscribed portion of the non-promoter shareholders is not pursuant to a decision by the Promoter/Promoter Group of the Target Company to consolidate their shareholding in the Target Company or to increase their control in the Target Company.

(2) The S4A Capital was infused pursuant to the requirements of the RBI and is therefore pursuant to a regulatory directive. If the First Tranche S4A Infusion had not been undertaken by way of unsecured subordinated debt, the implementation of the S4A Scheme would have been jeopardized and Target Company’s operations and financial health, irreparably damaged. The infusion of the remaining S4A Capital was imperative to ensure that the improved financial health of the Target Company pursuant to the First Tranche S4A Infusion is not jeopardized. The absence of such infusion would have affected not only the shareholders such as the members of JLF who have converted loan into equity under SDR scheme but also the public shareholders of the Target Company. It would also have detrimentally affected the interest of the larger stakeholder body of the Target Company such as its employees with respect to the Target Company’s ability to pay their remuneration and other Lenders with respect to servicing of the debt availed from them.

(3) The S4A Capital infusion has been financed through a borrowing by Acquirer 2. As a condition to availing this financing, Acquirer 2 is required to create a pledge/negative lien on the equity shares, it acquires pursuant to the Rights Issue as security for this financing. Accordingly, the proposed Rights Issue is imperative to satisfy the lender pre-requisite for financing the S4A Capital Infusion and is not pursuant to an intention of the members of the Promoter/Promoter Group of the Target Company to consolidate their shareholding in the Target Company or to increase their control in the Target Company.

(4) Given that the Capitalization is proposed to be undertaken by way of a Rights Issue, each shareholder of the Target Company is being provided with an opportunity to subscribe to the issuance of equity shares in proportion to their shareholding. If each shareholder of the Target Company subscribes to their respective entitlement, the shareholding of the members of the Promoter/Promoter Group of the Target Company would not change from its current levels. The current shareholding of the members of the Promoter/Promoter Group of the Target Company might change, and possibly the threshold under Regulation 3(1) of the Takeover Regulations may be breached, only because the Acquirers have agreed to acquire the portion of the Rights Issue that would not be subscribed to by the non-promoter shareholders, which, in turn, is solely being undertaken by the Acquirers to ensure that the Rights Issue meets at least the ICDR Threshold.

(5) Capitalizing the Capitalization Amount by way of equity is in the best interest of the Target Company as this amount would not need to be repaid by the Target Company, it would be subordinate to the existing debt of the Target Company and would preclude outflows from the Target Company on account of interest payments that are required to be made to service the S4A Capital Infusion.

(6) As per the shareholding pattern of the Target Company disclosed by it to the stock exchanges on which the equity shares of the Target Company are listed, from 2009 to 2014, the Acquirers were holding 45.69% of the paid up equity share capital of the Target Company and from 2014 to the date of the SDR Issuance, the Acquirers were holding 50.63% of the paid-up equity share capital of the Target Company. Accordingly, the Acquirers have always been members of the Promoter/Promoter Group of the Target Company and thereby in control of the Target Company.

(7) The members of the Promoter/Promoter Group of the Target Company (of which the Acquirers form a part) were holding 50.63% of the total paid up equity share capital of the Target Company prior to the allotment of fresh equity shares to the members of the JLF pursuant to the SDR Issuance (the “Pre-Allotment Share Capital”). The Pre-allotment Share Capital of the Target Company reduced to 20.74% of the total paid up equity share capital of the Target Company (“Post-Allotment Share Capital”) due to 2 (two) reasons: (a) the SDR Issuance to the members of the JLF; and (b) the invocation of pledge on the Invoked Shares that were held by Acquirer 1. Their shareholding has not reduced due to a divestment of shares on their part. In fact the members of the Promoter/Promoter Group of the Target Company have not sold any of their shares in the Target Company since 2009.

(8) In terms of the Takeover Regulations, there will be no change of control or management of the Target Company pursuant to the Rights Issue.

(9) Regulation 10(4)(b) of the Takeover Regulations provides for an automatic exemption from the obligation to make an open offer for acquisitions pursuant to Rights Issues if certain parameters set out therein are met, provided the pre-acquisition shareholding of the Acquirers is above 25% of the paid up equity share capital of the Target Company. In the instant case, while the pre-acquisition shareholding of the Acquirers is below 25% of the paid up equity share capital of the Target Company, the proposed acquisition is compliant with the parameters set out under Regulation 10(4)(b) of the Takeover Regulations.

(10) The members of the Promoter/Promoter Group of the Target Company had limited funds to deploy into the Target Company, which they have already deployed and are not in a position to complete the open offer given such paucity of funds and limited financial resources. Had the members of the Promoter/Promoter Group of the Target Company not infused the S4A Capital into the Target Company there would have been an event of default as the Target Company would have been in violation of the condition laid down in S4A Scheme/by the OC and such violation would have ultimately resulted in cross defaults detrimental to the existing shareholders.

(11) The Acquirers are aware that the subscription to the unsubscribed portion of the Rights Issue may trigger an obligation on the Acquirer to make a public announcement of an open offer for acquiring further shares of the Target Company under Regulation 3(1) of Takeover Regulations. This trigger of an open offer is technical in nature and an incidental event to the acquisition.

(12) SEBI has in the past granted exemption to acquirers from making open offer under Regulation 3(1) of the Takeover Regulations in various cases of other companies under similar circumstances.

CONSIDERATION - 6. I have examined the Application, the Addendum and various other submissions made by the Acquirers and other material available on record. I note that the current shareholding in the Target Company i.e. pre-acquisition by the Acquirers in the Target Company, is as provided below: SHAREHOLDING IN THE TARGET COMPANY AS ON MARCH 31, 2019 (SOURCE: APPLICATION) Sr. Name Present Shareholding No. No. of % shares Shareholding A. Promoter / Promoter Group 3,19,68,649 19.46% B. Public Shareholding 13,22,79,857 80.54% C. Total (A + B) 16,42,48,506 100% 7. After examination of all the relevant material, I note the following:

(a) The Target Company is facing financial problems and has undergone various restructuring exercises, including CAP, SDR in terms of the RBI’s Circular dated June 8, 2015 and S4A Scheme (for repaying such Residual Debt).

(b) The proposed acquisition is aimed at conversion of the Target Company’s debt, which the Acquirers (being the promoters) had brought in as a requirement for implementation of S4A Scheme by the Lenders/JLF, into equity capital through a Rights Issue.

(c) There is a possibility that the proposed Rights Issue may not be subscribed to by any or all the non-promoter shareholders, in which case the Acquirers have agreed to subscribe to any unsubscribed portion of this Right Issue to ensure that the minimum subscription threshold of 90%, as mandated under Regulation 14 of the erstwhile ICDR Regulations is met. In such a case, the proposed acquisition of the unsubscribed portion by the Acquirers may trigger the requirement of open offer under Regulation 3(1) of the Takeover Regulations. Thus, the proposed acquisition is contingent upon the non-participation by other shareholders, including Lenders who hold 54.04% of the paid-up equity share capital of the Target Company pursuant to the SDR issuance.

(d) The Joint Lenders Forum in its meeting dated Feb 22, 2019, has noted the following - “funds infused in the company by the promoter as part of S4A package should be converted to equity through a Rights issue and the company is awaiting approval from SEBI for the same. Since this was part of the S4A resolution plan approved by the overseeing committee the lenders agreed that the Lead Bank would give the approval on behalf of the consortium to SEBI if required”.

(e) The promoters / promoter group was holding 50.63% of the total paid up share of the Target Company prior to allotment of fresh shares to the members of JLF, in pursuance of SDR.

(f) There will be no change in control of the Target Company pursuant to the proposed acquisition.

(g) The objective of the proposed fund raising by way of Right issue is to infuse more equity, to enhance the company net worth by up to Rs.300 Crore and the capitalization of promoter’s debt. The Target Company intends to utilize the net proceeds from the proposed rights issue for the following:

i. The entire amount of subscription received from public shareholders shall be utilized towards meeting any object as may be decided by the Board of Directors of the Company, including but not limited to funding the Company’s working capital requirement, debt repayment and expenses incurred towards general corporate purposes in terms of the SEBI (ICDR) Regulations, 2018.

ii. Capitalization of unsecured debts of the Promoters in the Company which shall not exceed an amount of Rs.180 Crore.

(h) In respect of the proposed Right Issue, the Acquirers have given the following additional undertakings:

i. The Target Company will ensure that the proposed rights issue size is such that the Promoter’s subscription in the rights issue (including his entitlement, and unsubscribed portion, if any) does not exceed Rs. 180 crores (infused by promoter in the Company) by way of capitalization of unsecured debt.

ii. The balance amount due to Promoters shall not be repaid in cash to the Promoters till such time as the Optionally Convertible Debentures (“OCDs”) issued to the lenders of the Company as Part B debt under the S4A Scheme are fully repaid or converted into equity shares.

iii. The basis of allotment in the rights issue shall be finalized in terms of the SEBI (ICDR) Regulations, 2018. (i) The Target Company is in compliance with the minimum public shareholding requirements under the Securities Contracts Regulation Rules, 1957 ("SCRR").

8. Considering the aforementioned observations and taking a holistic view of the matter, I am convinced that the grant of exemption as prayed for by the Acquirers in respect of the proposed acquisition is in the larger interest of the securities market. Accordingly, I am inclined to grant the said exemption to the Acquirers in respect of the proposed acquisition, subject to certain conditions as ordered herein below.

ORDER - 9. I, in exercise of the powers conferred upon me under Section 11(1) and Section 11(2)(h) of the SEBI Act, 1992 and Regulation 11(5) of the Takeover Regulations read with Section 19 of the SEBI Act, 1992 hereby grant exemption to the Acquirers, from complying with the requirements of Regulations 3(1) of the Takeover Regulations with respect to the proposed acquisition of shares / voting rights in the Target Company, viz. Patel Engineering Limited, by way of proposed transaction as described in the Application and this Order, subject to the following conditions:

(a) The proposed acquisition shall be in accordance with the relevant provisions of the Companies Act, 2013 and other applicable laws.

(b) On completion of the proposed acquisition, the proposed Acquirers shall file a report with SEBI within a period of 21 days from the date of such acquisition, as provided in the Takeover Regulations. (c) The statements/ averments made or facts and figures mentioned in the Application and other submissions by the proposed Acquirers are true and correct. (d) The proposed Acquirers shall ensure compliance with the statements, disclosures and undertakings made in the Application and in subsequent submissions. (e) The proposed Acquirers shall also ensure that the all undertaking given by the Acquirers through various replies/submissions, shall be duly complied with. In any case of deviation, the Acquirers shall take prior approval of SEBI.

11. The exemption granted above is limited to the requirements of making open offer under the Takeover Regulations and shall not be construed as exemption from the disclosure requirements under Chapter V of the Takeover Regulations; compliance with the SEBI (Prohibition of Insider Trading) Regulations, 2015; Listing Agreement/SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 or any other applicable Acts, Rules and Regulations.

12. The Applications dated October 24, 2017 and July 26, 2018 and together with subsequent letters dated Jan 30, 2019, Feb 21, 2019, March 19, 2019, April 08, 2019 & April 23, 2019 filed by Acquirers, are accordingly disposed of.

DATE: August 09, 2019 G. MAHALINGAM PLACE: Mumbai WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA